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‡ u     Credit is defined as confidence

in borrower¶s ability & intentions to repay the
loan extended to him by the creditor. Credit has
become an integral part of modern
industrialization economies. It has been
considered as oil of the commerce. It
contributes to the industrial growth and
economic development.
‡ u     Credit
Management usually deals with the credit vetting
of the customers, allocation of available funds to
different sectors/segments of the economy,
diversifying the applicable risk in extending
credit, internal funds movements &
reconciliation, as also maintaining relations with
the customers
-Credit Appraisal & Credit Monitoring. Credit
Appraisal deals with the evaluation of credit
needs of the borrower, his worthiness, his ability,
his risk, policy regarding extension of credit to
the borrowers, terms and conditions of the
credit, sanctioning process of the Bank and
involves a decision whether to extend the credit
or not to the customer- pre sanction stage.
Once a decision to extend the credit is taken, the
borrower is asked to complete all the formalities
of the terms and conditions, signing of the
documents etc.(Pre disbursal stage). After
which the credit is disbursed to the borrower.
‡      This is a post disbursal
period and is very important for the banker since
the health of the unit is determined during this
phase. Banks are required to keep constant
watch on the unit vis-à-vis the loan account after
disbursal of the loan, to ensure that the amount
disbursed to the unit is safe, is being utilised for
the purpose extended (ensuring end use of
funds), generates income and does not turn out
to be sick. There are three types of follow up
that constitutes credit monitoring ± (a) Financial
follow up (b) Physical follow up (c) Legal follow
‡ u  
  The loan account by itself
would indicate explicitly the quality of the loan.
There are bound to be warning signals before an
account goes bad viz., (i) Reductions in credits
(deposit entries) in the loan account if it is a
working capital account (ii) issuing cheques to
the creditors by the borrower in excess of the
limit/Drawing Power (DP) available in the
account, thereby frequent returning of these
cheques (iii) Delays and defaults in repaying the
interest/ instalments (iv) Non-submission/Delay
in submission of the stock statements and/or
financial data to the Bank. There is a need to
identify these signals emanating from a loan
account. If the Bank does not take prompt follow
up action, it could result in further defaults,
thereby leading to a further degeneration in the
quality of the loan and create problem loans.
V   The Banker grants financial
facility to its customer under a valid contract, the
terms and conditions of the financial assistance
are enumerated. Further, the terms of
repayment as well as the consequences in the
event of breach of conditions are enumerated.
As a part of initial exercise, during the post
sanction phase, the bank obtains certain
documents from the borrower/competent
authority of the borrowing Company duly signed
so as to bind the borrower legally and enforce
charge. The importance of the documents lies in the fact
that with proper documentation in force, there will not be
any problem in enforcing a claim by the bank in case of a
default by the borrower.
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In case of persistent default by the customer, where all
other measures taken by the banker including reviving of
the unit are not successful, the recourse open to the
bank is
(i) Enforce the repayment or enforce the security available
through the Court of Law. A common complaint of the
banks and financial institutions had been that they were
facing enormous bottlenecks in the recovery of loans
through the Civil Courts. In view of this the Government
took initiative and established Debt Recovery Tribunals
(DRTs). However, even after establishment of DRTs,
enforcing security is still a time consuming process.
(ii) To enter into a compromise proposal with the
defaulting borrower.
In this connection on recommendations of
Narsimahan Committee for the purpose of
examining Banking Sector reforms, the GOI
promulgated Securitization and
Reconstruction of Financial Assets and
Enforcement of Security Interest Ordinance
2002 (SARFAESI) which was later on replaced
by an Act . Provisions of this act enable Banks
and Financial Institutions to exercise power in
taking over the possession of the securities, to
sell them without intervention of Court subject
to completion of certain formalities thereby
reduce their non-performing assets.
Banks Traditional role is to mobilize the funds from
the household sector/surplus from the
Corporates and deploy it with the household and
Corporate Sector for consumption/productive
purpose. Its role is that of intermidiary. As such
Banks are exposed to various risks.
The price at which the Banks mobilize and transfer
funds depend on two parameters ± the time for
which the funds are made available and credit
worthiness of the person to whom the funds are
made available. Considering long term loans are
priced higher than short term loans and a high
risk borrower pays a higher price (interest),
banks will have to factor liquidity risk and/or
credit risk to earn spreads. There is also a
definite linkage between the various risks faced
by the banks. For example, if the bank charges
a client floating rate of interest, in case of
increasing rate scenario, the bank¶s interest rate
risk will be lower. Consequently, the payment
obligations of the borrower increases. Other
things remaining constant, the default risk
increases if the client is not able to bear the
burden of the rising rates. There are many
instances where the interest rate eventually
leads to credit risk.
A top priority of the banks is to improve their asset
quality by minimizing and managing their credit
risk. A robust credit risk management framework
with a proper risk management model coupled
with the sound/speedy legal framework
improves the quality of the assets.
Another technique being employed by the Banks
to reduce interest and liquidity risk is Asset-
Liability Management (ALM). ALM has both
macro and micro level implications. At macro
level it leads to the formulation of critical
business policies, efficient allocation of capital
and designing of products with appropriate
pricing strategies.
At micro level, the objective is two fold ± it aims
profitability through price-matching and ensuring
liquidity by maturity matching. Price matching
maintains spreads by ensuring deployments of
liabilities is at a rate higher than the cost.
Similarly, grouping the assets/liabilities based on
their maturity profile ensures liquidity. The gap is
then assessed to identify the future financing
    Banks and lending institutions
have a traditional resistance, to share credit
information because of confidential nature of
banker-customer relationship. To serve this
purpose and to make credit and other data
available specialised institutions known as
Credit information bureaus have been set up.
They serve as repository of current & historical
data of the existing and potential customers.
CIBIL was promoted by SBI, HDFC, Dun &
Bradstreet Information services (P) Ltd. to
provide credit information of clients to its
members. Presently, its shareholding pattern
has been diversified to include number of banks
and finance companies.
CIBIL collects commercial and consumer credit-
data and collates such data to create and
distributes credit reports to its members. CIBIL
primarily gets information from its members and
at subsequent stage will supplement it with
public domain information in order to create a
truly comprehensive snapshot of an entity¶s
financial track record.
A         is a factual record
of borrower¶s credit payment history. Its purpose
is to help credit grantors make informed lending
decisions-quickly and objectively. CIBIL caters
to both consumer and commercial sectors.
Consumer Credit Bureau covers credit availed
by individuals while the Commercial Credit
Bureau covers credit availed by non-individuals
e.g. partnership firms, proprietary concerns,
Private and Public Ltd. companies etc.
| Credit Management
is concerned with the sound principles of lending
which are mainly concerned with the activity of
the borrower and the profile of the borrower as
(a) Ensuring safety: Bank being a custodian of
funds of the depositors must ensure safety of the
funds deployed and lend the funds only to
reliable borrowers, who after generating surplus
from their business can repay back the loan
amount along with the interest. Banks
traditionally create charge on collateral
marketable securities of the borrower, in addition
to the primary security. This enables them to
dispose off the marketable securities in case of
default by the borrower and recover the amount
of defaulted loan. But with changing time and the
banks having assumed the role of fore-runners
in the socio-economic development with the
extension of credit to the non-traditional and
neglected sector, sufficient collaterals may not
be available to the banks. Thus the viability of
the business and its capacity to generate surplus
becomes best security for the Banks. To ensure
safety of the funds this aspect has assumed
more importance than the collaterals.
(b) Ensuring Liquidity: The Banker mobilises funds
from the depositors and lends the same to the
borrowers on specified repayment terms. The
borrower should be able to generate surplus
funds to repay back to the banker, otherwise
liquidity of the banker gets affected and in turn
he may not be able to repay back the depositors
funds on terms and conditions deposit is
mobilised. A bank¶s inability to meet the
demand for withdrawals of the depositors can
lead to a run on the bank, which can pose a
threat to its basic survival. Thus the exercise of
ensuring liquidity with the borrower also
amounts to ensuing liquidity with the bank.
Liquidity would also refer to the quality of assets
which should be easily convertible into cash
without any loss of value. Thus the concept of
liquidity entails the banker to look for easy
saleability and absence of risk of loss on sale of
assets, which has been taken on collateral.
(c) Generate Profits: Banks provide various credit
facilities & other services to the customers and
it is also prudent on the part of the banker to
extend certain concessions to the customer on
some of the services, in view of competition
concession may be given to the customer in rate
of remittances / non-funded business or vice-
(d) Purpose: Banks should lend the funds only for
productive purposes and should also ensure
End use of funds. Banks should not lend funds
for unproductive purposes, speculative
purposes, hoarding stocks or for anti-social
activities, since apart from morality such
activities have inherent risks involved with
regard to repayment of loan.
(e) Adequate security: Banks traditionally extend
credit facility against collateral security.However,
amongst the banks. Thus the banks consider
overall profitability of the business extended to
the bank by the customer rather than profitability
against each component of the business or
service offered. Such an analysis of the
business from the customer is known as
customer profitability analysis or more often in
the language of the bankers ³Value of the
account´. Thus there is a direct relationship
between profit and pricing of services offered by
the banker. Example: In case if a customer is
availing of substantial credit limits in working
capital/Term Loan and the amount of interest
earned in the previous years is substantial,
bank before extending credit facility must ensure
that collateral is sufficient to cover the loan
amount, is easily marketable and is free of
(f) Risk Management through diversification: The
principle of never keep all the eggs in the same
basket applies to lending also. Banks should
lend to a large number of industries and
borrowers, so that risk gets diversified.